Investments  

What are the real implications of intergenerational wealth transfer?

  • Describe the issues around intergenerational wealth transfer
  • Identify changes in the population affecting wealth
  • Explain the advantages of using a trust
CPD
Approx.30min

Parents or grandparents could loan or gift money directly, but this would not afford the same combination of flexibility, IHT mitigation and wealth preservation/protection. The 7-year rule applies at the point a direct gift is made to remove it from their IHT-assessable estate, but the money now forms part of the recipient’s estate immediately.

The issue here is that if the recipient(s) get divorced or have their own IHT liabilities, money could be lost to the family. If instead the parents/grandparents loan money directly to their children/grandchildren, the loan remains in the lender’s IHT-assessable estate but can be protected in the event of divorce/their own IHT liabilities. In addition, any loan from the Inheritor Plan can, at the Trustees discretion, remain outstanding for the recipient’s lifetime (or the end of the 125-year perpetuity period, whichever comes sooner), thereby netting off against their estate for Probate & IHT purposes.

John Humphreys, Head of Sales at WAY Group, told me that: -

  • 97 per cent of WAY Flexible Inheritor Plan reversions are deferred by the trustees to a later anniversary as the settlor does not need any ‘income’ but they like the comfort that it is available to them should their circumstances change (such as requiring care or the demise of a spouse/civil partner drastically reducing their income, i.e., reducing to 50 per cent widows’ pension).
  • Over 50 per cent of WAY Flexible Inheritor Plans remain invested after the demise of the settlor because the next generation do not ‘need’ the money (as they are often in their 50’s themselves and have their own IHT liabilities), so the money remains invested until it is loaned (or appointed) to the grandchildren of the settlor when they go to university or start buying houses.

Moreover, the WAY Inheritor Plans include a clause that enables a sub-trust to be created, into which assets of the main trust could be transferred, so if a WAY Inheritor Plan were coming to the end of its 125-year perpetuity period, the trustees could transfer the assets into a new sub-trust, which would then have another 125 years to run.

This could also be used if the current Inheritor Plan trust structure were to become ineffective due to a change in legislation. If the provider could create a new sub-trust, which complied with and was effective with any change in legislation, the trustees could transfer the remaining assets into the new sub-trust and continue protecting and preserving the assets. If the creation of a new sub trust, which complied with any change in legislation, was not possible, the trustees of the existing Inheritor Plan could simply appoint the remaining assets to the Beneficiaries and wind the trust up.  

Of course, there are instances where a Family Investment Company may be a more suitable vehicle, along with the consideration of other areas of planning such as extensions of exit strategies or succession plans for property investors and business owners where Business Relief-qualifying assets require careful planning. This is where a proposition such as the Ralstan Group comes into its own. Founded by Andy Lee, the Ralstan Group covers all aspects of estate planning, tax planning, UK Trust design, etc, in order to create a bespoke solution to the needs of a client.

What I like about this area of planning and these propositions is that they focus on using money as the tool, not the goal and allow our industry to demonstrate the real business that we are in, whilst showcasing it from a different perspective and highlighting that planners are in the business of playing the role of a financial architect by constructing a financially stable, future-proof structure for their clients. As Abraham Lincoln said, “the best way to predict the future is to create it”.